Insufficient Information Summary

As a result of its favorable fiscal regime for insurance companies, Luxembourg has the potential to become one of the major European centers in the insurance sector, states a 2009 U.S. Department of Commerce’s Country Commercial Guide. In the International Monetary Fund's (IMF) 2002 Financial System Stability Assessment, insurance supervisory practices in Luxembourg were benchmarked against Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF concluded that Luxembourg had a high level of observance with all relevant ICPs. Furthermore, the report noted that the preconditions for effective insurance supervision were in place and mostly implemented in a satisfactory way. The Insurance Commission was established under the 1991 Law on Insurance Services as an independent supervisory body for the insurance sector. However, given the revision in October 2003 by the IAIS of the ICPs and Methodology, subsequent to the IMF assessment, there is insufficient information publicly available regarding Luxembourg's compliance with the new, more stringent principles.

General Overview

As concluded in the International Monetary Fund's (IMF) 2002 Financial System Stability Assessment, Luxembourg had a high level of observance with all relevant Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF made only a few recommendations and noted that the preconditions for effective insurance supervision were in place and satisfactorily implemented for the most part. Furthermore, the assessment stated, the insurance supervisory authority, the Insurance Commission (CAA), had adequate resources to carry out its duties, including on-site inspections. The IMF report further noted that the CAA was funded through the levying of taxes on insurance companies. However, the IMF recommended increasing the CAA's staff "to face the rapid growth in the number of supervised companies and size of balance sheets" (p. 42). However, the IAIS revised the ICPs in October 2003, and there is insufficient information publicly available regarding Luxembourg's compliance with the new, more stringent principles. The 2002 Article IV Consultation report of the IMF suggested using stress tests to assess the industry’s pliancy and resolve issues as they are exposed, and to institutionalize the exchange of information between the CAA and the Public Prosecutor on cases involving suspicious activity reporting. Luxembourg’s authorities responded by saying that there were plans already in place to implement the IMF’s recommendations. However, as of October 2009, there is no information as to whether these recommendations have been implemented.

The legal framework for the insurance sector is mainly based on the 1991 Law on Insurance Services (hereafter LIS). The CAA was established under the LIS as an independent supervisory body for the insurance sector. Regulatory work was the responsibility of the Minister of Treasury and Budget, within the Ministry of Finance (MoF), upon recommendation of the CAA, as noted in the IMF's 2002 assessment.

As a result of its favorable fiscal regime, according to a 2009 U.S. Department of Commerce Country Commercial Guide, Luxembourg has the potential to become one of the major European centers in the insurance sector. Luxembourg has the largest reinsurance base in the European Union (EU), according to a 2009 report by Kleyr and Schwartz, and has many major international insurance companies active in its life insurance market. The authors also note that the main activity for insurance companies in Luxembourg is cross-border sales, which constitutes premiums of over 95 percent. As of September 2008, per a February 2009 U.S. Department of State International Narcotics Control Strategy Report, there were 95 insurance companies, and 260 reinsurance companies in Luxembourg. Per the 2009 report by Kleyr and Schwartz, Luxembourg’s insurance sector has demonstrated an outstanding ability to resist shocks despite the global financial crisis. Due to its favorable business environment and stability, and its secure and attractive legal and tax framework, Luxembourg will likely continue to attract numerous international insurance and reinsurance companies, the 2009 Kleyr and Schwartz report concludes.

According to the CAA 2008 annual report, the EU Commission proposed in July 2007 a new risk supervision Directive called Solvency II that aims to revise the rules preventing insurers from going bankrupt. After a lot of deliberations of which Luxembourg was a part of, Solvency II was adopted in May 2009, and is expected to be implemented into national law by 2012/2013. The report further adds that, although Luxembourg has yet to implement Solvency II, more than 80% of Luxembourg’s non-life insurance and over 50% of life insurance, with a significant number of reinsurance companies, took part in a coordinated quantitative impact study launched by the Commission to test the proposals regarding the new quantitative requirements of Solvency II. This was performed to see how companies will fare under the new directive when it is implemented.

The CAA is a member of the Association of Insurance Supervising Authorities in the EU, as well as a member of the IAIS.

The Principles

IIICP 1 Conditions for effective insurance supervision

As a member of the EU, according to the IMF's 2002 assessment, Luxembourg has established a clear and detailed legal framework for the insurance sector, which was mainly based on the LIS. The law provides the CAA with several tools to carry out its supervisory task, including on-site inspections. Despite this information, however, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 2 Supervisory objectives

As noted in the IMF's 2002 report, the CAA's supervisory objectives were clearly stated in its annual report and circular letters, which provided transparency to insurance supervision in Luxembourg. However, subsequent sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 3 Supervisory authority

The CAA was established under the LIS. Per information on the Marsh website, this law was updated by the Laws of December 8, 1994 and December 5, 2007 that relate to the Insurance and Reinsurance sectors. It was also amended by the Grand Ducal regulations of December 20, 1991 and December 31, 2001 to make the CAA an independent supervisory body for the Insurance Sector. Regulatory work was the responsibility of the Minister of Treasury and Budget, upon recommendation of the CAA, as noted in the IMF's 2002 assessment. The IMF report further noted that the CAA was funded through the levying of taxes on insurance companies and had adequate resources to carry out its duties, including on-site inspections. However, the IMF report recommended increasing the CAA's staff "to face the rapid growth in the number of supervised companies and size of balance sheets" (p. 42). The Luxembourg’s authorities responded by stating that there were plans to increase the staff by 10 percent annually. However, there is little information publicly available as to whether this recommendation has been implemented, and the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 4 Supervisory process

According to the IMF's 2002 assessment, the CAA provided publicly available information to the market through annual reports and circular letters, and met with insurance companies and consumer groups on a regular basis to inform them of its policies and objectives. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 5 Supervisory cooperation and information sharing

According to the CAA website, the CAA collaborates with both domestic and foreign supervisors whenever there are prudential reasons that require a collaborated effort. The website also mentions that the CAA is a member of the Association of Insurance Supervising Authorities in the EU, as well as a member of the IAIS.

As Luxembourg’s insurance companies conduct the bulk of their business in foreign countries, particularly in the area of reinsurance and life insurance, they are highly dependent on strong international cooperation, as noted in the IMF’s assessment in 2002. The IMF report further noted that collaboration among supervisors at the company level seemed to be effectively established. Per the same report, the CAA was given powers under the LIS to exchange information with other authorities, provided that such information is subject to professional secrecy conditions. However, due to the growing linkages among financial sectors, the IMF assessment recommended improving the coordination process between the different supervisory authorities and the prosecutor. Despite the information provided above, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 6 Licensing

As stated in the IMF's 2002 assessment, Luxembourg carried out an in depth supervision of the licensing process. Furthermore, the Minister of Treasury and Budget approved licensing upon recommendation of the CAA. The IMF report noted that the Luxembourg system of licensing, which appeared to be rather strict, enabled the CAA to assess the suitability of companies' management. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 7 Suitability of persons

In its 2002 assessment, the IMF noted that the Luxembourg system of licensing, which appeared to be rather strict, enabled the CAA to assess the suitability of companies' management. According to the 2009 Kleyr and Schwartz report on Luxembourg’s insurance sector, Luxembourg does not impose restrictions on private foreign investment by individuals/companies, except for distinguishing between EU and non-EU entities. The report adds that when insurers, reinsurers, banks, or investment undertakings licensed in a EU jurisdiction are concerned, the CAA must consult the home supervisory authorities of these undertakings in order to evaluate the quality of shareholders and the professional expertise of the management lest they have influence on the subsidiary’s activity. With respect to investment by foreign governments, there are no restrictions or specific requirements except where there are UN embargos or EU restrictions. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 8 Changes in control and portfolio transfers

Under the 2007 amendment to the LIS, according to the IMF's 2002 report, the CAA and the Minister of Treasury and Budget must be informed of a change in control of the company. Per the same report, the CAA had the authority to accept or reject the change in control. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 9 Corporate governance

As noted in the IMF's 2002 assessment, the insurance supervisory authorities were "not responsible for exercising control over the roles of the different bodies of the company apart from the provisions of the law dealing with insurance" (p. 43).
Until 2006, the corporate governance framework in Luxembourg consisted of the 1915 Law on Commercial Companies (as amended). In April 2006, the Luxembourg Stock Exchange established the Ten Principles of Corporate Governance for listed companies, which entered into force on January 1, 2007. These Principles are based on the comply-or-explain principle, and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors, as noted in a 2006 report by the Luxembourg Bankers’ Association. The Ten Principles underwent a general revision in 2009 and the new version entered into force on October 1, 2009. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 10 Internal control

According to the IMF's 2002 assessment, "the CAA has set up a practical framework of control that enables it to check the quality of the internal controls of insurance companies" (p. 43). The IMF report further noted that internal controls were implemented in accordance with the 2007 amendment to the LIS. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 11 Market analysis

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 12 Reporting to supervisors and off-site monitoring

The IMF’s 2002 assessment noted that the insurance accounting system was regulated by the 1994 Law on the Accounts of Insurance and Reinsurance Undertakings, which sets adequate standards for insurance companies in line with the 1991 EU Directive on the Annual Accounts and Consolidated Accounts of Insurance Undertakings No. 91/674/EEC. Furthermore, the concepts of "auditors" and "actuaries" were established by the Luxembourg supervisory authorities for life insurance companies.

As of 2005, according to the May 2007 update available from the Deloitte & Touche IAS Plus website, Luxembourg’s companies listed on an European Union / European Economic Area stock exchange, including banks and insurance companies, are required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU. Luxembourg permits IFRSs as a legal option for banks and insurance companies, according to a 2009 PricewaterhouseCoopers report. Currently, other companies that intend to adopt IFRSs need the approval of the Ministry of Justice. Companies that choose not to adopt IFRSs follow Luxembourg’s Generally Accepted Accounting Principles (GAAP). According to the Deloitte 2007 report, however, the Luxembourg GAAP differ from the international standards. Further changes in accounting requirements are underway in Luxembourg's legal environment, as well. As explained in a 2007 IAS Plus update, "IFRS will be introduced into the local Luxembourg commercial law as an alternative to the current Luxembourg accounting principles." As of December 2009 there is no information on the conversion of Luxembourg’s GAAP with IFRSs. However, there is insufficient information publicly available regarding Luxembourg's compliance with this principle subsequent to these changes, and as revised by the IAIS in 2003.

IIICP 13 On-site inspection

As stated in the IMF's 2002 assessment, the legal framework for the insurance sector in Luxembourg was mainly based on the LIS, which provided the CAA with several tools to carry out its supervisory task, including on-site inspections. The IMF report noted that although the CAA was experienced in carrying out in depth on-site inspection on an individual basis, it might be limited by the small number of its staff in conducting effective on-site inspections of reinsurance companies. The report recommended an increase in staff to make inspections more effective. According to Luxembourg’s authorities, there were plans to increase the staff by 10 percent annually. However, there is little information publicly available as to whether this recommendation has been implemented and the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 14 Preventive and corrective measures

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 15 Enforcement or sanctions

According to the IMF's 2002 assessment, while the CAA had "an adequate legal framework to sanction insurance companies that behave inappropriately" (p. 44), it only used its powers occasionally. Per the same report, the CAA had "adequate tools to face difficult situations" (p. 45). Nevertheless, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 16 Winding-up & exit from the market

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 17 Group-wide supervision

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 18 Risk assessment and management

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 19 Insurance activity

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 20 Liabilities

In its 2002 assessment, the IMF recommended establishing a more comprehensive process, and enhancing the regulatory framework in the field of asset liability management. Nevertheless, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 21 Investments

In its 2002 assessment, the IMF recommended establishing a more comprehensive process, and enhancing the regulatory framework in the field of asset liability management. Nevertheless, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 22 Derivatives and similar commitments

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 23 Capital adequacy and solvency

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 24 Intermediaries

According to the IMF's 2002 assessment, the CAA was responsible for the supervision of Luxembourg-based intermediaries companies. It relied however on foreign supervisory authorities to assess the quality of foreign intermediaries. The IMF report noted that the implementation of the EU Insurance Mediation Directive No. 2002/92/EC into Luxembourg law would ensure a stronger cooperation among authorities in the field of insurance intermediaries. Per information in the 2004 annual report of the CAA, the 2005 amendment to the 1991 LIS transposed this directive into Luxembourg law. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 25 Consumer protection

The CAA is responsible for consumer protection, as noted in the IMF's 2002 assessment. The tasks of the supervisory authorities in the field of consumer protection and market conduct are detailed in the 2007 amendment to the LIS. Furthermore, a number of regulations have been implemented in the field of market conduct in Luxembourg. The IMF report noted that sanctions could apply in the event of non-compliance with the CAA's directives on consumer protection. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 26 Information, disclosure & transparency towards the market

As noted in the IMF's 2002 report, the CAA's supervisory objectives and activities are clearly stated in its annual report and circular letters, which provide transparency to insurance supervision in Luxembourg. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

IIICP 27 Fraud

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

IIICP 28 Anti-money laundering/ Combating the Financing of Terrorism

According to a 2009 U.S. Department of State’s International Narcotics Control Strategy Report, Luxembourg’s key Law on Anti-Money Laundering and Combating the Financing of Terrorism, was enacted in 1989 and was subsequently updated. The law criminalizes the laundering of proceeds for predicate offences that include narcotics trafficking, corruption, weapons offenses, and fraud, among others. It also provides for customer identification, record keeping, and suspicious transaction reporting (STR) by financial institutions. Per the U.S. Department of State’s 2009 report, a new law enacted on July 17, 2008 further strengthens customer due diligence and risk management procedures to prevent money laundering and terrorist financing. Moreover, it requires transparency among contracting parties and widens the scope of predicate offenses, while setting minimum guidelines for prosecuting money laundering offences that are in line with the Financial Action Task Force’s (FATF) recommendations. However, no further information as to Luxembourg’s compliance with ICP 28 is publicly available.

In its 2002 assessment, the IMF recommended fully implementing the anti-money laundering (AML) Action Plan to ensure consistent approaches to AML activities within and across all sectors, including insurance. It further encouraged the CAA to improve information sharing with the prosecutor of Luxembourg for AML and combating the financing of terrorism (CFT) purposes. According to a subsequent IMF’s 2004 report on the implementation in Luxembourg of the FATF’s Recommendations for AML/CFT, "Luxembourg has a well developed supervisory framework that encompasses AML/CFT preventive measures broadly in line with international standards" (p. 7). The IMF report further noted that customer identification requirements for insurance companies were relatively similar to those for banks. The implementation of AML/CFT measures was however limited to life insurance products.

According to a September 2009 Ernst & Young publication, the CAA issued Circular 09/6 “on the scope of professional obligations in the fight against money laundering and terrorist financing and the prevention of the use of the insurance sector for the purpose of money laundering or terrorist financing” (p.21). This replaces Circular 08/5 and makes Luxembourg’s anti-money laundering requirements current with international and national regulations. Per the same report, the new circular makes changes to the risk based approach, gives precise definitions of ‘politically’ exposed persons and ‘beneficial owner,’ a detailed description of the client identification procedure, recourse to specific third party service providers for client identification, and stipulations regarding third countries that are considered as imposing equivalent requirements.